Small Cap Value Report (Wed 4 Apr 2018) - TPT, OTMP, MTC

4th Apr '18 by Paul Scott

27 comments 15863 reads

Good morning, it's Paul here!

I'm still jet-lagged, so am waking & sleeping at very odd times - no change there, I hear you cry! Anyway, I've been up since 4am today, and have finished yesterday's report , adding a new section on the trading update from Hornby (LON:HRN) . Quite an interesting special situation actually, but not one I'm tempted to buy.

Market comments

Small caps seem to be in a terrible patch at the moment, so my portfolio is really suffering. Still, it's a marathon, not a sprint, and this type of gloomy market is when (selectively) we can find some bargains. Also, I feel that 2017 was so ridiculously good, that many small caps became over-valued. So a correction to more sensible valuations was inevitable at some point.

Graham and I began to sound like a stuck record last year - concluding our reviews on many stocks, with - nice company, but the shares look too expensive. With valuations now generally having corrected downwards, hopefully we can unearth some more sensible buying opportunities this year. After all, the time to catch the bargains is when other people are too fearful to buy on good news.

I don't see any reason at all to expect a sustained bear market. We have good growth in the world economy, in all main regions. UK consumer confidence is fairly weak, but the outlook seems quite encouraging to me - inflation has peaked, and is now falling. We have full employment, wages are rising, and look set to soon overtake inflation - meaning that the pinch on disposable incomes is coming to an end.

Very unusual weather in the UK has also had an impact this year to date. Winter weather carried on through until the end of March. Therefore retailers & hospitality companies have seen lower footfall. There seems to have been a shift from consumer spending away from things, towards experiences - e.g. I read yesterday that holiday bookings are bucking the trend - surprisingly, at a time of weak sterling.

However, I think it's important to remember that, when we buy a share, we're not just buying this year's earnings, we're buying all earnings in perpetuity. So if prices are marked down because this year's earnings have been hit by one-off factors (such as poor weather), then that…

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GrahamF

4th Apr '18

With regard to the market direction generally, I took a look at the Earnings Upgrade Momentum Screen this morning. There are only 19 qualifying stocks, 3 of which are incarnations of John Laing.

I don’t know how many stocks this screen typically finds and broker forecasts can be lagging, but it strikes me that just 19 qualifiers suggests that there is quite some way to go before market sentiment generally turns more positive.

Metatron

Any stocks trading below book value as with both most high street retailers & commercial rental landlords could be the big surprise winners over the next few years as book value as a value criteria has underperformed for years and mean reversion suggests book value is due a bull market

rpmeurope

C&C Group are to acquire a chunk of Conviviality for a nominal sum. It looks like they are taking on a substantial portion of the debt as well.

https://www.investegate.co.uk/c--38-c-group-plc--ccr-/bus/acquisition/20180404081200Z4268/

aaupfo

Concurrent Technologies (CNC.L) announced its final results for the year ended 31 December 2017 today, that its reported revenue stood at £16.2 million, compared to £16.4 million in the preceding year.
Profit after tax was £2.8 million compared to £2.8 million.
The company’s diluted earnings per share was 3.79p, compared to 3.90p.
The company declared a final dividend of 2.20p per share compared to 2.10p in the comparable period.

The shares are down 7% presently for in-line results.

Paul could you have a look at this solid company that produces up market computer boards, which recently announced a number of new products as well.

matylda

Hi Paul,

Thanks for the great Topps Tiles (LON:TPT) update, just wondering as it wasn't mentioned (or I missed) - Do you believe the Dividend to be sustainable?

HumourMe

Although I'm bearish based on market zigs and zags, for this screen the answer to your 'typical' is 12-13, shown to the right of the chart.

So if anything 19 is bullish, although with such small average numbers statistically I doubt there is a real difference.

Matboulton

Thanks Paul, interesting comments on Topps Tiles (LON:TPT).

I largely agree with your sentiments regarding Topps Tiles (LON:TPT) being a well structured company with a long term profitability. Particularly interested in the trade focus that they are adopting. As for retail they have a great online presence and the stores well positioned as a 'one stop shop/up selling ' for all tiling products. I can't help but think this company will kick on with the uptake in general house building and planning relaxations.

One to watch (I don't currently hold, got stopped out at 83p last week) with the right conditions.

Thanks for that. I hadn’t spotted that the average number of holdings is stated on the screens.

Tortoise investor

Having bought tiles recently one thing I'd caution against Topps Tiles (LON:TPT) is the amount of online competition. Topps Tiles (LON:TPT) is a well-known brand and its samples are cheap (a useful way of enticing customers), but some of the online competitors are undercutting it or are similar on price. Plus you can order other bathroom or kitchen furniture from some of its competitors (e.g. Victorian Plumbing) which is convenient for doing one big order or for reducing the overall cost of delivery (which can be quite expensive on bulky bathroom stuff). I also wonder why you need physical stores for tiles, at least for ordinary customers, as it's easy to get samples through the post so perhaps they will be disadvantaged against some of the online-only competition. In the end I bought my tiles from other competitors for reasons of price and style.

The Topps Tiles (LON:TPT) website is very easy and intuitive to use though. I like the sound of other opportunities in the commercial segment so, despite the comments above, I've added it to my own watchlist and may do further research at some point.

brileen

Thanks, Paul. Another high quality report.

They have helped me enormously over the past couple of years.

BB

HornBlower

Mothercare new CEO stating he needs to put the company on a "secure financial footing". with debt of £50m and market cap of only £30m how does that work? that is before structural revenue decline, too many high rent stores and cash outflows to fund refurbs and closures. probably need to raise best part of £100m cash. even then probably won't work.

Jeremy Grime

The solution for REITS
Paul - you are right the CVA is the short term solution for all these retail businesses who sign up for 5-20 year leases with no visibility on their revenue. I am confident this will induce a change in the property law rather like we had it in 1986 in residential property with the assured shorthold tenancy when there is no tenants rights but they can walk away quickly. No such thing exists in commercial property law. In residential it caused the buy to let boom when private rented went from 3% of the housing stock to 20%.
I think the same will now happen in commercial property. Which would be the turning point for Intu and Hammerson as they own the retail stock. Then the tenants can have a go at low risk and we get more vibrant pop up retail space. And just maybe the REITS will trade nearer NAV.
Just in case you want to go short that may be the reason that could be wrong. But it may take a long time I guess.

cw6365

I was interested in Onthemarket (LON:OTMP) but when you think about it their whole concept is to save agents money compared to the big two. But the problem is because of the dominant market share from the other two the agent would still have to pay for them two as well as Onthemarket (LON:OTMP), essentially costing the agent more. It's better off signing agents up for free and maybe use an affiliate / pay per click model.

Wimbledonsprinter

While I agree that the retail landlords will have problems, I do think that much of this (if not more), is already in the price for many REITS. Looking at Land Securities, for example, it reail properties are valued (in the NAV) at an equivalent yield of c4.5% (a wide spread to gilts). On top of this, the stock is trading at a 35% discount to NAV and remembering that London offices make up nearly half of the portfolio - so there is a significant fall in the retail part of the portfolio that is priced in. Also LTVs (leverage) remain relatively modest.

ricky65

As usual, very insightful macro analysis. Thanks.

Paul Scott

5th Apr '18

Hi Matylda,

Do you believe the Dividend to be sustainable?

This question relates to Topps Tiles (LON:TPT) .

I note that the divi last year was slightly reduced, from 3.5p to 3.4p, so that does raise a question mark over future divis.

Brokers are forecasting divis this year & next, and they get their steer from the company.

You would need to trawl through the previous results updates & trading updates, doing a CTRL+F search for the word "dividend", and see what it throws up, in terms of comments.

Looking at the numbers, I can't see any particular reason why the company would need to stop paying divis. Its balance sheet looks OK, although it has some debt, but that doesn't look excessive compared with profits.

Regards, Paul.

Thanks Paul re: Topps Tiles (LON:TPT).

Yes, I noticed the reduction there too which seems to have been a precursor to the revisions today (Liberium note) which are down about 8% or so to 3.1p, 3.2p and 3.4p for 2018/19/20. Seems coverage is around 2x so hopefully they can be sustained around these levels.

Thanks again for the coverage, the response and the macro note (most useful all round).

shauniekent

I feel like any commentary on the market is amiss if not considering the change in direction of the US Fed. Rates are now on a rising path and 'quantitve tightening' is planned. They exact opposite of policies which have given us such a buyoant and un-volatile market for the last 10 years. A lot of people would argue this has been THE driving force in markets for the past decade.

Maybe i'm too eager to seethe disaster around the corner but i'm not positive about the general market. I felt similar a year ago though too.

dsmorgan

Hi Paul,

What does CVA mean?

Thanks for the insightful article.

Regards, Daphne

ezlifeme

To save Paul and my blushes - I always like to Google the answer and in this case wikipedia gives you LOADS of options https://en.wikipedia.org/wiki/...

and under Economics the options are-

Collateral Valuation Adjustment, a concept in debt restructuring
Credit Value Adjustment, a credit component of FAS 157 Fair Valuation - see Mark-to-market accounting#FAS 157
Credit Valuation Adjustment, the market value of counterparty credit risk
Certified Valuation Analyst, a specialist in business valuation standards
Company voluntary arrangement, for companies in insolvency

Last one looks the likely culprit

Small Cap Value Report (Wed 4 Apr 2018) - TPT, OTMP, MTC

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Paul Scott

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